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State Oil Firm’s Scandal Shatters Brazil’s Offshore Dreams

Oil was to have been Brazil’s “passport to the future,” but the grand dreams tied to state company Petrobras have been brought to a screeching halt not only by falling crude prices, but by a crisis of its own making.
An expanding investigation into a kickback scandal at Brazil’s largest company is rippling through the industry, suspending contracts, cutting off credit supplies and forcing layoffs at shipyards and other firms that had been gearing up for the anticipated oil boom, a report by AP suggests.
Not long ago, President Dilma Rousseff had promised that exploration of rich, offshore fields would create hundreds of thousands of jobs and provide royalty income to finally improve Brazil’s schools and health care system. But with no end to the investigation in sight, it’s anyone’s guess as to when Brazil will reap the rewards of its oil wealth.
“In 2008, everyone thought Brazil was becoming an oil superpower,” said Adriano Pires, an energy consultant and former official at the government National Petroleum Agency. “Those big plans of expansion are all being reviewed.”
Federal investigators say that over the last decade, construction firms paid about $800 million in bribes and other funds by overvaluing contracts with Petrobras and funneling some of the money to the ruling Workers’ Party and its affiliates.
Eighty-seven people have been charged so far, including two former Petrobras directors. And on Friday night, the Supreme Court gave the attorney general permission to expand the investigation to dozens of politicians, including a former president and the heads of both houses of congress.
“It cast suspicion on all of Petrobras’ contracts,” said Claudio Pinho, a lawyer who specializes in the oil and gas industry. “It’s paralyzing the whole operation of the biggest companies, which, in practice, halts all of the projects Petrobras needs to develop now.”

Wider Crisis
The woes at Petrobras are contributing to a wider crisis hitting Brazil’s economy, which observers say likely entered recession in 2014 and is forecast to shrink further this year.
The problems at Petrobras, which controls 90 percent of an oil industry that employs 400,000 people, are creating a domino effect. Suppliers under investigation are barred from signing any new deals with Petrobras. The limitation is especially crippling because, by law and depending on the project, the oil industry must use local suppliers for up to 65 percent of the equipment and services needed for its projects.
The scandal comes on top of the dive in global oil prices which has hampered expansion projects around the world. The double-punch is certain to derail Petrobras’ goal to boost production to 5 million barrels a day by 2018 and become one of the world’s top five oil companies.
Yet last week, Petrobras announced it would sell $13.7 billion worth of assets as it tries to improve its cash situation and relieve its $135 billion debt.
Experts say two things must happen quickly for Petrobras to recover: Its new leadership, put in place after the mass resignation of its top executives in February, must convince investors it will root out corruption; and the government needs to relax local-contractor quotas, something ordinary Brazilians greatly oppose. At present, neither scenario looks possible, and the best that could happen would be for oil prices to rise, making offshore development attractive for potential partners.

Top Politicians Investigated
Brazil’s Supreme Court will investigate the speakers of both houses of Congress and 32 other sitting politicians in connection with the multibillion-dollar kickback scheme at state-controlled oil company Petrobras, Reuters reported Saturday.
A court official said on Friday that 12 senators and 22 congressmen from five parties are under investigation, all but one from Rousseff’s governing coalition. The most prominent are the president of the Senate, Renan Calheiros, and the speaker of the Chamber of Deputies, Eduardo Cunha, both of the PMDB, Brazil’s largest party and Rousseff’s main coalition ally.
The Progressive Party has 21 members under investigation, the PMDB six and the Workers’ Party five, including Senator Gleisi Hoffmann, Rousseff’s chief of staff during her first term. The party’s treasurer Joao Vaccari will be investigated.
Only one opposition politician, Senator Antonio Anastasia, of the PSDB party, was on the list, which includes Senator Fernando Collor de Mello, a former president who resigned in 1992 to avoid impeachment for corruption.
Under Brazilian law, elected politicians can only be tried by the highest court, which must now decide with the help of prosecutors whether there is enough proof to put them on trial.
The investigation could take years. Brazil’s largest political corruption case until now, involving monthly payments to lawmakers in return for support in Congress for Rousseff’s Workers’ Party, took seven years to get to trial in 2012.
The scandal threatens Brazil’s already weak economy by prompting Petrobras to halt or cancel key investment projects. Companies in the energy and construction sectors are finding it harder to obtain credit. The corruption probe has so far led to 40 indictments on racketeering, bribery and money laundering charges, including two former Petrobras senior managers and 23 executives from six of Brazil’s leading construction and engineering firms.
Rousseff was chairwoman of Petrobras’ board of directors from 2003 to 2010, when much of the alleged corruption took place. She has denied knowing about the scheme during those years and has vowed to respect the judiciary’s independence.
Brazil’s real currency tumbled 7 percent in the week to 3.05 per dollar on Friday, it lowest close since 2004, and stocks retreated more than 3 percent, on investor worries that the political storm will hinder a fiscal adjustment and cause Brazil to lose its investment-grade credit rating.